Covid-19: The impact on investments Q&A

There is no doubt that the Covid-19 coronavirus pandemic is a worrying time for all. Many of us will have family or friends who are either elderly or in higher-risk groups. It is, of course, the fear of the unknown both in terms of what the outcome will be, and how long it will take before we come out of the ‘other end’.

It is this same fear that has caused significant turmoil in the financial markets. As financial advisers, it is, of course, our day to day commitment to help our clients with long-term investment planning and ensuring that there is appropriate diversification within our clients’ portfolios.

A key part of our job is to communicate with you during times of uncertainty and unknowns, such as we are experiencing now.

Several of our clients have been in touch with concerns and questions regarding their investments. We thought it would be helpful to provide a list of the most common questions we have encountered. This will hopefully give you our candid view of where we are, and the outlook ahead.

Q: What has been the effect of coronavirus on markets so far?

A: We experienced a strong 2019, and going into early 2020, generally the stock indices were close to their highs on the back of a positive economic outlook.

However, bad news came in the evidence of Coronavirus spreading outside of China, and the result has been a sharp and fairly brutal stock market sell-off as the bad news got priced in.

Q: How much have markets fallen? How low can they go? Can they recover?

A: If we look at things in UK FTSE-100 terms, at the beginning of 2020, the market stood at around 7,500 points. At the time of writing (16th March 2020) it is hovering around 5,000, which means the UK stock market has fallen by around a third (33%) since the start of the year.

This is a level of correction not seen since the financial crisis in 2008 when – at its worst point during that year – the UK stock market fell by as much as 42%.

We can’t know how low the markets can go, or if indeed, where we are is already the low point. However, history does show that market corrections are typically followed by a recovery.

In 2008 – the worst year of the financial crisis, although the UK stock market fell as much as 42% from the start of that year, it had recovered virtually all of those losses by the end of 2009.

I would encourage you to read our ‘Guide to Investment’ which puts short-term market volatility and corrections into context against longer-term returns and strategy.

Q: Should I buy or sell?

A: It is notoriously difficult to ‘time’ markets. Certainly, selling out of investments when they have fallen in value is not typically a sensible approach; it crystallises a paper loss into a real one.

As someone neatly put it, shares are the only thing that people want to sell when the price drops and buy when the price is up. It is important to ‘Keep Calm & Carry On’.

A number of our clients have used this pullback to get money into the investment markets, at a more competitive price. For the right individual with the right risk tolerance, this is an opportunity to buy investments at distressed prices.

If you could go back in time and buy your home at a 33% discount, you would. Today, investors have the same opportunity to buy shares at a 33% discount to where they were just a few weeks ago. Whilst no-one knows where the bottom of this market is, investors who buy and hold – whilst there are of course no guarantees – should be rewarded in the long term.

Of course, all of us are different so contact your adviser to see if this is something you should be thinking of.

To save any confusion we aren’t stockbrokers so can’t advise you on direct stocks and shares.

Q: Will worldwide government policies work?

A: It quickly became apparent that it was impossible to prevent the virus from spreading globally. So, the emphasis from governments and health authorities turned to slowing the spread and managing healthcare.

This is certainly a viable strategy, as evidenced in China which has, albeit through rather draconian measures, managed to contain the virus and has recently been returning to more normal levels of economic activity. Encouragingly, there has also been a decline in new cases in South Korea, one of the largest outbreaks outside of China. These are potential rays of sunshine for the future, though we will only know how successful we have been ‘globally’ in a few months’ time.

Q: If there are potential rays of sunshine, why have markets kept falling?

A: At the moment markets are concerned about the degree of disruption caused by the measures being implemented in the developed world to slow the spread. These will inevitably have an impact on the demand and supply of goods and services (travel being an obvious one). Whilst the uncertainty around these exists, market volatility will remain high.

Q: What happened at OPEC last week?

A:As if Coronavirus was not enough, last week the market was also hit by turmoil between OPEC and Russia. Since 2017, OPEC and Russia (which isn’t in OPEC) have attempted to limit their production in order to keep the oil price at reasonable levels.

However, last week a combination of lower oil demand – driven by efforts to constrain the spread of the coronavirus – and a realisation that their strategy was not working, have created a “perfect storm” for OPEC.

This has led to price discipline breaking down and failure to reach an agreement with Russia on production cuts. The result is that OPEC members are now increasing their production, despite low demand, leading to the falls in the oil price seen last week. These falls further fed into stock market volatility.

What’s Legal & Medical’s view of the markets?

It is clear that markets are still struggling to price in the risk of the virus.

The ‘positive’ scenario is that the management of the virus is brought under control before it feeds into the wider economy and that one or two-quarters of production is lost, but demand picks up thereafter. In this scenario, we would hope to see a fairly sharp recovery in markets.

A more ‘pessimistic’ outlook is that the effects of the pandemic feed into the wider economy and hit companies in a more permanent way, which then leads to some company failures and causes a longer more protracted downturn before eventual recovery.

Whilst the coronavirus is not going away anytime soon, central governments worldwide have already cut interest rates to record low levels and have started injecting billions of dollars’ worth of stimulus measures into their economies, to at least soften the blow if not avoid recession.

Whether this downturn is a matter of weeks or months, or indeed proves to be more protracted – we believe the best course of action for our clients is to maintain composure and hold positions, particularly as portfolios are typically well-diversified.

This guide is not intended to be ‘personal’ advice. Please approach your adviser for advice.

What is your view on the situation of the stock markets? Are you concerned? Let us know by adding a comment below.

This article was written by Malcolm Norris

Malcolm has been a financial adviser to medical and dental professionals for over 20 years. He is a Chartered Financial Planner and a G60 Pension Specialist, with pension planning being one of his many fields of expertise.

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